Buy Shriram Transport Finance Ltd For Target Rs. 2250 - ICICI Direct
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Play on auto financing at attractive valuation
About the stock: Shriram Finance (SHF) is large financier with a strong rural presence engaged in credit solution for commercial vehicles, two wheeler, car loans, home loans, gold loans and small business.
* As of 31 March 2023, SHF has a huge presence with 2922 branches across India and employee count of 64052, customer base of ~73 lakhs
* In November 2022, Shriram group entities - Shriram Transport Finance, Shriram City Union Finance & Shriram Capital merged to form Shriram Finance resulting in one of the largest NBFCs with AUM of | 185683 crore.
Investment Rationale
* Faster growth seen in non-auto business; market dominance to benefit credit growth in CV business: Strong demand from sub-prime borrowers, recovery in rural economy & construction activity are expected to drive CV growth. Factors attributable for continued growth in AUM – 1) large presence with more number of touch points in rural and semi urban areas, 2) high vintage and better customer understanding, 3) ability to price valuation of used vehicle, 4) improving share of faster growing non-auto AUM. Thus, we expect double digit growth in AUM at 14-15% in FY24-25E, with non-auto portfolio growth seen at faster pace.
* Prudence in underwriting to keep asset quality stable: Higher growth in weak cycles has led to elevated NPA formation. However, prudence in business growth as per the cycle is expected to keep asset quality steady. Further, dataset of large customer base will enable better under writing. Thus, we expect Stage 3 assets to decline from 6.1% in FY23 to 5.3% in FY25E and credit cost to remain at ~2% in FY24-25E.
* Diversified borrowing to aid margins; efficiency and lower credit cost to drive RoE; While cost of funds is expected to increase amid increase in MCLR by banks, diversified asset base with improving proportion of nonauto segment, potential for a rating upgrade is seen to enable sustainability of margins. Further, improvement in efficiency (~2.6-2.7%) and steady credit cost is expected to RoA at ~3%.
Rating and Target price
* SHF is well placed to benefit from healthy CV cycle with 14-15% growth in AUM and RoA improving to ~3%. Exit of large shareholders has put an end to overhang on the stock. Thus, we assign BUY rating on PHF, in anticipation of reduction in valuation gap with peers.
* We value PHF at ~1.7x FY25E standalone ABV and assign a ~2x multiple on FY25E ABV with a 20% holding discount. Thus we arrive at a target of price of | 2250/share
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